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'The Paradox of Success': The Effect of Growth, Competition and Managerial Self-Interest on Building Society Risk-Taking and Market Structure, c.1880-1939

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  • Luke Samy
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    Abstract

    Some scholars have posited that mutual banks have fewer incentives to engage in excessive risk-taking than joint-stock banks because of the unique structure of property rights in the mutual firm.� This paper uses their theory as a framework to explain the divergent risk-taking behavior of building societies between the pre-war and the inter-war periods, and between large and small societies in the latter period.� It is argued in this paper that the low risk-taking behaviour predicted of mutual financial institutions like building societies can only be expected of small regional societies which were less exposed to competition than their larger, city-based counterparts which competed more aggressively for investor funds and mortgage business.� In the inter-war period, increased competition between societies led to levels of risk-taking hitherto unseen in the movement, leading to calls by the movement's leaders to consolidate the sector into the hands of a few large societies.� This process of consolidation promised to benefit members and to improve the overall efficiency of societies in the movement.� The actual experience however shows that these promises were largely unmet.� Rather, it is shown that the only beneficiaries of firm growth were building society managers, who were able to extract higher pay from empire building.

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    File URL: http://www.economics.ox.ac.uk/materials/papers/4817/samy86.pdf
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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number Number 86.

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    Date of creation: 01 Jan 2011
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    Handle: RePEc:oxf:wpaper:number-86

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    1. Rasmusen, Eric, 1988. "Mutual Banks and Stock Banks," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 395-421, October.
    2. Smith, Bruce D., 1984. "Private information, deposit interest rates, and the `stability' of the banking system," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 293-317, November.
    3. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    4. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
    5. J. Bradford De Long & Richard Grossman, 1992. "Excess Volatility on the London Stock Market, 1870-1990," J. Bradford De Long's Working Papers _133, University of California at Berkeley, Economics Department.
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